Company Profile: Omega Healthcare Investors

by Jeff Shaw

A Port in the Storm

Omega Healthcare Investors rides out recessions, regulatory sea changes and pandemics to remain one of the largest owners of senior care facilities.

By Jeff Shaw

Omega Healthcare Investors launched in a way that was extremely unusual at the time. Essel Bailey Jr. founded the company in 1992, but had few assets to show — $400,000 in cash and a contract to buy 37 skilled nursing facilities for $120 million. Omega was started in a manner similar to what today is known as a special purpose acquisition company (SPAC) transaction: The initial public offering is used to raise the money for the initial acquisition rather than to support an existing company.

But the idea worked, the properties were acquired, and Omega has traded on the New York Stock Exchange under the ticker symbol OHI ever since.

The company thrived for many years, with the stock price nearly doubling from $21 per share at its introduction in 1992 to $39.87 per share in 1998. The portfolio grew over this period to over 250 properties.

However, changes in the government reimbursement structure for Medicare included in the Balanced Budget Act of 1997, specifically the ones capping payouts for certain services, began to hit home. Many operators left the business altogether at that time, and Omega’s stock price foundered — falling to below $2 per share by 2001.

“Omega’s current financial challenges are the byproduct of unprecedented financial difficulties in the long-term care industry,” Bailey said at the time.

Explorer Holdings, a venture capital firm, stepped in with a $100 million equity infusion in July 2000, and Bailey retired as Explorer began a search for the new CEO. Taylor Pickett accepted the job in 2001.

“I was brought in to get properties back working and collecting rents, and get the balance sheet deleveraged,” says Pickett.

In 2004, with Omega’s stock price stabilized and rising, Explorer sought to exit its investment by selling to another REIT. However, it became apparent that a second public offering would raise more proceeds than a sale.

“What we all thought would be a three-year gig turned into a permanent one, and now it’s 21 years later,” says Pickett. “From 2004 until now, it’s just been a matter of growth.”

Omega’s stock hit an all-time high of $44.96 per share in October 2019 and stabilized around $30 per share following the COVID-19 pandemic.

Diversify to thrive

As of June 30 of this year, Omega’s portfolio had grown to 921 assets: 711 skilled nursing facilities, 181 independent living and assisted living communities, six specialty and acute-care hospitals, two inpatient rehabilitation facilities, seven behavioral health facilities (for those with substance abuse and psychological issues), 12 traumatic brain injury facilities and two medical office buildings. The assets are located throughout the country, as well as over 100 properties in the United Kingdom.

“We are not focused on growth for growth’s sake,” says Matthew Gourmand, senior vice president of corporate strategy at Omega. “Our focus has always been to allocate capital to quality assets with the aim of growing recurring cash flow per share. That said, given the fragmented nature of the skilled nursing industry, we believe there remains a strong opportunity to grow accretively.”

While the company has no plans to leave the seniors housing industry, the diversification into other healthcare sectors is a trend that Pickett expects will continue.

“There’s a deep need for more behavioral health facilities,” says Pickett. “Part of the reason that’s interesting from our perspective is that it’s one of the few reuses for our skilled nursing facilities. They’re tough to repurpose, but you can serve those with psychological and substance use disorders in those spaces pretty easily.”

Gourmand adds that the number of residents at mental institutions has declined 80 percent since the 1950s, even though the need for mental healthcare has not significantly changed. Combined with the explosion in opioid addiction over the last 20 years, this results in an underserved population that needs more behavioral health facilities.

“It is not like the concept of mental illness has gone away,” says Gourmand. “The patients are just not being treated effectively.”

Pickett also noted that the company is continuing to shift toward more private-pay seniors housing.

“We have grown significantly in assisted living and memory care in the last eight to nine years. As our growth trajectory continues, you’ll see us lean more toward growth in those segments.”

“To the extent that we see further opportunity to accretively allocate capital, we will continue to grow in these spaces,” adds Gourmand. “However, the primary reason that it is growing as a percentage of the portfolio is that it is growing from a low base. We remain focused on growing in the skilled nursing space.”

Although COVID-19 not surprisingly had a negative effect on property performance — Omega’s total occupancy was around 85 percent in January 2020 compared with 77 percent in June of this year — diversification helped soften the blow. Omega was already in the process of culling non-core assets and reducing the number of operational partners from 90 to 60 when the pandemic struck.

“We were focusing on operators that had the clinical capabilities we think will be important 10 years from now,” says Pickett. “We focus on quality, strong resident survey results and a proven track record.”

Quite a few of the operators being removed from the portfolio originally came along with one large transaction, when Omega purchased Aviv REIT for $3 billion in 2014. That deal included 37 operator relationships across 31 states as Omega took on a portfolio of 312 skilled nursing properties totaling 26,520 beds.

“Many of our biggest relationships start off very small,” says Pickett. “Once an operator proves it can deliver results, the financials follow. Many of the operators we culled from the portfolio were left over from previous acquisitions. If you don’t have quality, sooner or later the results will reflect it. You can’t shortchange care to try and make extra money and have that be a model that’s sustainable.”

When choosing an operator, Gourmand says the company likes those with a regional focus, strong hiring practices and a willingness to empower that staff, and attention to detail. Of course, the most important factor is the quality of care.

“Everything starts and ends with clinical care,” says Gourmand. “If you have poor clinical care, sooner or later it will be reflected in your reputation, your referral rates and, eventually, your financial performance.”

The fact that facilities in the U.K. account for over 10 percent of the REIT’s portfolio has helped as well, notes Pickett, as occupancy, staffing and acquisitions have returned to pre-pandemic norms there. In the U.K., Omega’s deal pipeline is already bigger than it was pre-pandemic. The U.S. seniors housing industry, however, is at least a year away from a return to normal, Pickett believes.

“In the United States, there’s still some lag in acquisition activity. Occupancies are still not back. We’re not in the pre-COVID world for analyzing assets. We’re just not there yet. From a deal perspective, not being sure about where occupancy will go makes underwriting complicated for both buyers and sellers,” adds Pickett.

Another advantage of the U.K. portfolio is that Omega can use those properties’ performance as a bellwether for where the COVID-19 recovery is headed in the U.S., adds Pickett.

“The only thing that might be impactful is where interest rates will be when the recovery happens. Will there be a shift that changes how people think about capital? As a REIT that can borrow relatively inexpensively, that would probably be a favorable outcome for us, as it would cut down on competition.”

Where labor and technology meet

When it comes to the labor crisis facing the seniors housing industry, Pickett observes a trend. In locations where infection control was better, occupancy remained higher for fairly obvious reasons — fewer existing residents were getting sick and dying, and the property was considered safer for those looking to move in.

This trend also had a knock-on effect for employment. If residents were healthier and happier, so were the frontline workers. Consequently, the workers were more likely to remain on the job.

“If you had fewer residents getting sick and passing away, the ability to retain your workforce was higher,” recalled Pickett. “The labor shortage tracks to the occupancy, generally. People were scared. Getting the labor force back is a battle in the environment we have today.”

One way to fight that battle is to implement technology that lowers the stress on workers while improving outcomes for residents. Although seniors housing historically has been “slow to adopt technology solutions because labor was relatively inexpensive and available,” COVID-19 changed that, says Pickett.

“You’re going to see a much more significant embrace of technology solutions on the labor side,” he emphasizes.

As an example, Pickett cites advanced fall monitoring and intervention technology. If, for example, a memory care resident who is on blood thinners falls and can’t describe what happened, caregivers have to err on the side of caution, presume the resident hit his or her head, and send the resident to the hospital.

“More than half the time that’s not a needed intervention if you have technology that can show you what happened with the fall,” says Pickett. “Technology can take a bit of the burden off the labor force.”

Omega also owns Connected Living, a communications technology company. “The Connected Living platform allows communities to simplify staff workflow and enhance resident engagement,” according to the company’s website. “Our innovative suite of technology solutions allows for swift communications to everyone who is a part of your community, regardless of their digital proficiency.”

What this means in practice is that caregivers can communicate with groups of people on a targeted basis. For example, a worker can talk directly to one resident, plus family members and caregivers who work with that resident. Alternatively, a property-wide message can be sent to all residents, family members and employees.

“One of the big issues with COVID was lack of communication — the ability to let people know what’s going on without dialing 300 different phone numbers,” says Pickett. 

“We have technology that ties people together and can sort the people based on who you want to communicate with. That takes some burden off caregivers, giving them more time to be with residents.”

Big company, big deals

Being a large, publicly traded REIT means making headline-worthy deals. Omega did just that in 2021 with one of the biggest transactions of the year, acquiring 24 Brookdale Senior Living-operated properties. Healthpeak sold the assets, located in Arizona, California, Florida, Illinois, New Jersey, Oregon, Pennsylvania, Tennessee, Texas, Virginia and Washington, for $510 million.

The acquisition was attractive on a numbers basis thanks to its 8.5 percent annual yield, Pickett notes. But Omega was also happy to strengthen its relationship with Brookdale, the largest operator in the United States with more than 668 seniors housing properties in its portfolio.

“The Brookdale management team is very impressive,” says Pickett. “We interact with the Brookdale team on a lot of things, including the technology we just talked about. Brookdale has individuals that focus entirely on technology solutions. Interacting with its sophisticated team is beneficial for us.”

Omega is also the capital partner for Maplewood Senior Living’s high-end Inspir brand, which has made some headlines of its own. The first Inspir property is a 23-story, 215-unit high-rise on Manhattan’s Upper East Side that opened in March 2021. It offers assisted living, memory care and what the company calls “enhanced care.”

The ultra-luxury project features benefits such as a house geriatrician through a collaboration with the Brookdale Department of Geriatrics and Palliative Medicine at the Icahn School of Medicine at Mount Sinai, which was recently ranked the No. 1 geriatrics program in the country by U.S. News & World Report. Residents receive coordinated access to services at the Martha Stewart Center for Living and the Mount Sinai Health System.

Inspir Carnegie Hill also partnered with Rusk Rehabilitation’s Horticultural Therapy Program at NYU Langone Health to introduce the benefits of horticulture therapy to their memory care residents to reduce stress and improve cognitive function.

“It’s the Four Seasons of seniors housing. It’s unbelievably nice,” says Pickett. “Maplewood CEO Greg Smith had a vision of high-end real estate and high-end care with concierge services, true chefs in the kitchen, incredible clinical protocols and lots of technology. 

“From our perspective, it was a little tough making the call at the board level that we’re going to jump into this product in New York City that really didn’t exist until we built it. It’s turned out to be fantastic.”

The property is “filling up as planned” and is about 60 percent full 18 months after opening.

The next Inspir community is already underway. In September 2021, Maplewood and Omega acquired The Fairfax Embassy Row, an eight-story hotel in the Dupont Circle neighborhood of Washington, D.C. 

Following a full renovation — “it’s being gutted right now,” according to Pickett — the 173,932-square-foot senior living residence will feature 174 units of assisted living and memory care. The property is located less than two blocks from the Dupont Circle Metro stop, and minutes away from the White House, Pennsylvania Avenue, Smithsonian Museum, Philip Collection and Anderson House.

“We have taken careful consideration to identify locations where we can truly offer exceptional resident experiences that are reflective of the history, culture and vibrancy of the cities that surround them,” said Maplewood’s Smith when the D.C. project was announced. “After opening our debut location in New York City, we explored other markets domestically and internationally where there was a void we could fill.”

Pickett says the Omega/Maplewood partnership is currently looking for new Inspir locations in Florida and the West Coast, as well as London, “trying to replicate what we have in Manhattan.”

“The future of both the company and the industry are bright,” says Gourmand. “With the demographics that the industry is facing, we believe that both federal and state governments will need to work with the skilled nursing industry to ensure that the next generation is properly provided for. 

“As for Omega, we will continue to focus on supporting and growing with quality operators so they can focus on doing what they do best — serving their residents.” n

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